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UK Government launches consultation on business energy efficiency measures, including possible abolition of the CRC

GOVERNMENT CONSULTS ON BUSINESS ENERGY EFFICIENCY MEASURES, INCLUDING POSSIBLE ABOLITION OF THE CRC

The Government has launched a major consultation on the energy reporting and taxation regime for UK businesses. The consultation recognises that at present there are a number of overlapping energy efficiency schemes in force. This has created a high degree of complexity and potentially does not incentivise behaviours as intended. The Government is therefore considering reform to simplify regulation and meet EU 2020 environmental targets through encouraging investment in energy efficiency and low-carbon alternatives. Notably the proposals include replacing the Carbon Reduction Commitment Energy Efficiency Scheme ("CRC") and Climate Change Levy ("CCL") in favour of a single business energy consumption tax (based on the current CCL) and a single reporting framework. The consultation appears to set the tone for extensive future engagement in this area rather than setting out any definitive conclusions. This may present businesses with an opportunity to influence the future direction of policy.

This consultation was expected. Energy efficiency policy has been widely criticised for its complexity, variable success and overlapping regimes. In response, the Government announced a review of the whole area in the summer 2015 budget. Indeed, the most eye-catching proposals - replacing the CRC and CCL and the move to a single business energy consumption tax based on the CCL – were foreshadowed as early as 2012. In its budget at that time the Treasury announced that a full review of the CRC's effectiveness would take place in 2016, and that the "tax will be a high priority for removal when the public finances allow".

Nevertheless the breadth of the approach taken in the present consultation is striking. The CRC was first introduced in 2010 and has already undergone simplification. It requires participants to monitor and report their energy use and buy allowances for every tonne of carbon dioxide they emit. Whilst generally seeking views on the energy efficiency reporting and tax landscape, the Government has also brought seven specific mechanisms (in addition to the CRC) into the review:

the CCL – a levy on the supply of energy to business and public sector consumers, with separate rates for each of electricity, gas, coal and liquefied petroleum gas;

Climate Change Agreements ("CCA") – voluntary agreements which give eligible sectors a discount on the main rates of CCL in exchange for agreeing to meet energy efficiency targets;

mandatory greenhouse gas ("GHG") reporting – which obliges UK companies quoted on the main European and North American stock exchanges to report on their greenhouse gas emissions as part of their annual Directors’ Report;

the Energy Saving Opportunity Scheme ("ESOS") – the recently introduced scheme that requires all large undertakings and their group undertakings to audit their energy use in the UK every four years;

The number of schemes under consideration underlines the need for rationalisation. For example, as things stand a single business could in theory find itself measuring and/or reporting its energy use under each of the CRC, ESOS, CCAs, and GHG reporting, as well as potentially the EU Emissions Trading System. Each scheme then requires different (though often overlapping) types of information and has differing verification requirements. Businesses are likely to welcome the Government's consolidation proposals in this respect.

In addition, the consultation emphasises the need to incentivise improvements in energy efficiency in view of the Government's commitment to meeting its environmental targets. In 2007 the EU set an energy saving target of 20% by 2020, against a 2007 business-as-usual projection, as part of the EU’s 2020 climate and energy package. This also includes binding greenhouse gas emissions and renewable energy targets. The consultation stresses the need to meet these targets in a cost effective way. In that context it is interesting to note that the Government's current focus on energy efficiency comes amidst increasing fiscal scrutiny of the cost of decarbonising energy itself. This consultation follows closely after the Government's July 2015 announcement of a range of measures to control the costs of renewable energy subsidy schemes under the Levy Control Framework and the controversial removal of the exemption from the CCL for renewable electricity generation in the summer 2015 budget.

Challenges in consolidating divergent regimes

Government has already held discussions with businesses, academics and other bodies, and reviewed overseas schemes, in order to build an evidence base prior to this consultation. However at this stage there are few specific proposals in the consultation and even less detail on how they might be implemented. It seems clear that Government intends to consolidate the various regimes – but given their different (and often conflicting) structures this will involve a number of significant policy decisions. For example:

ESOS requires 'large' companies (defined by reference to employees and turnover) and their group companies to audit their energy use. Conversely, the GHG reporting regime focuses on listed companies and the CRC focuses on companies consuming energy above certain thresholds. The consultation states that it will design the reporting framework through the "prism" of ESOS given it implements requirements of the EU Energy Efficiency Directive. But this may be difficult in practice due to the way in which ESOS has been implemented. Its emphasis is on compliance by groups, the definition of which can give rise to ambiguous and sometimes conflicting interpretations;

the GHG reporting regime includes international emissions but does not require external verification, whereas ESOS is concerned with UK energy only but must be verified;

charities and third sector organisations currently exempt from tax under the CCL are not exempt under the CRC, and the status of these organisations remains to be considered; and

a prominent feature of ESOS and the CRC is the provision for group-wide joint and several liability (albeit they do allow for disaggregation) and it is not clear whether this would be the case in a consolidated regime.

Broad nature of the consultation may present an opportunity for businesses

In addition to consolidating regimes, the Government asks for views on the balance of tax costs across fuels and across sectors. It also raises the prospect of entirely new mechanisms being developed to encourage businesses to maximise their energy efficiency and carbon abatement potential. Views are invited on incentives such as tax relief, funding awarded on a competitive basis and feed-in tariffs.

The consultation appears to set the tone for extensive future engagement in this area, and seeks to gauge business opinion on a range of options aimed at consolidating and enhancing current policies. It does not set out any definitive conclusions. It is likely to be the start of an in-depth process, which will presumably include further more detailed consultation.

The broad nature of this consultation may present businesses with an opportunity to influence the future direction of policy. Businesses wishing to participate can access the full text, and submit responses, here. This consultation is open until 9 November 2015.

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